Friday, April 8, 2011

Today in Silver

Two weeks ago we made a post that speculated that Silver might hit $40 by March 31st, 2011 in what was basically a buying feedback loop.

And while it failed to do so, 7 days later Silver has now broken that $40 barrier and closed going into the weekend at $40.93 with a stunning gain of $1.29 today.

ZeroHedge has come out with a great post citing a report from the Morgan Stanley metals desk explaining the stunning rise in price today:
  • I was told on Wednesday that big buying went thru on Tuesday in may atm silver calls which should make the market short gamma.
  • A short gamma position will become shorter as the price of the underlying asset increases. As the market rallies, you are effectively selling more and more of the underlying asset as the delta becomes more negative.
  • So what that means is that the SELLER of the calls, probably bought Physical to delta hedge themselves neutral. As this market jumps just about 1-2% daily (this week alone +6.5%) they would need to now re hedge to bring themselves back to neutral by BUYING more Physical as SILVER goes higher, essentially driving the market Higher still and so the chase goes theoretically moving the market higher causing them to buy more to hedge and moving the market higher, thus buying into rallies.
  • Now they could BUY puts also to create positive Gamma as well to offset some of that pain they are not bound to the Physical for their hedge. Lots of what if's but that’s the idea.
  • On the other side if Silver were to gap lower, this would not help either as they would need to SELL Physical into a falling market to re-hedge themselves.
  • Great in a slow steady market, nightmare in a volatile one.
As Tyler Durhan of ZH notes... Translation: ever-accelerating feedback loop (both higher and lower). Volume is about to go off the charts.
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